JP Morgan - Lippo Karawaci – Aggressive expansion plan on the cards (O/W)

Aggressive expansion plan on the cards. The company recently aimed for a more aggressive expansion plan, as it plans to double its mall operations to 50 malls and increase its hospital operations by six-fold to 24 hospitals. Instead of acquisitions, the bulk of it would be via greenfield expansion. To achieve this target, we estimate that the
company would need to incur US$525-900mn of capex for the next three to five years. The company has received board approval to sell Siloam Hospital Cikarang and Siloam Hospital Semanggi to First REIT, in which transaction value would reach Rp250bn and would generate Rp195bn gain to LPKR.

What are the viable financing options? The company’s net gearing is standing at 41% as of 1H10. The company estimates sale of Siloam Hospital Cikarang would generate US$28mn of cash inflow. We estimate FCF for the next two years is US$17-20mn p.a. Assuming $525mn of capex in three years, we estimate net gearing of the company
would be around 93%, still below the company’s internal net gearing target of 100%. At aggressive target of US$900mn of capex, net gearing could rise above the company's internal target, if fully debt-funded.

A more positive stance in dividend policy. The company has not paid dividend in the last two years, and the company stated that they would allocate 25-30% of net income as dividends annually. We see this as a step in improving investor perception and narrowing discount to NAV.

New potential catalysts, maintain OW. We maintain our OW with June-11 target price of Rp800, based on 25% discount to NAV. Currently, the company is trading at 54% discount to NAV, near trough valuation. On a peak up-cycle, the company trades at 25% discount to NAV. Key risks (1) higher-than-expected construction cost, (2) delay on projects/construction of the developments.